Japan's economy shrinks 1.2% in quarter

Slowdown is greater than expected; Bank of Japan seen on hold

By

ChrisOliver

HONG KONG (MarketWatch) -- The Japanese economy contracted at the fastest pace in more than four years in the second quarter, raising concerns that what's been a corporate-led recovery may be losing steam as capital expenditures also fell sharply.

Japan's economy shrank 1.2% in the April-to-June quarter from a year earlier, revised downward from a preliminary estimate that had pegged growth at 0.5%, the government's Cabinet Office said in data published on its Web site Monday.

'The risk that the corporate-sector recovery peters out before wage growth starts picking up appears to be on the rise.'
Hiroshi Shiraishi, Lehman Brothers

Economists had expected the economy to contract by 0.7% from the year-earlier quarter.

Moreover, capital spending by Japanese businesses contracted 1.2% from the previous quarter, the Cabinet Office said.

Public investment fell 2.6%, slightly more than earlier estimates for a 2.1% contraction, while personal spending, which accounts for roughly 55% of the economy, expanded 0.3%, revised down from an earlier 0.4% rise.

Hiroshi Shiraishi, chief Japan economist for Lehman Brothers, noted that capital spending has now contracted for three of the past four quarters, while exports were also on a weakening trend. The emerging picture raised concerns about the two pillars supporting Japan's cyclical recovery.

"The outlook for exports seems to be deteriorating, with the U.S. economy slowing and the yen appreciating," Shiraishi said.

Japanese financial markets fell Monday, with the Nikkei 225 Average (1804610) declining 2.2%, surrendering 357 points to 15,764.97. The U.S. dollar rose to 113.66 yen in late Tokyo trading Monday, up from 113.48 yen in late New York Friday. See Asia Markets.

Analysts said much of the economic data had already been discounted ahead of Monday's release.

"Most economists have already downgraded their forecasts," said Yoji Takeda, a fund manager who helps oversee $950 million for RBC Investment Management Asia. He added traders had shifted attention to concerns over the health of the U.S. economy and the impact this would have upon Japanese exports.

"Investors are fairly shocked by this U.S. nonfarm payroll number, and more and more people are worried about a U.S. recession," Takeda said.

Assessing the fallout

The Cabinet Office's revised data showed the economy contracted 0.3% in the April-to-June period on quarter, marking the first time the economy has shrunk in three quarters.

The quarterly decline was the largest contraction since a 0.4% decline recorded in the first quarter of 2003.

Analysts said the weaker data were likely to reignite debate over the health of the Japanese economy and effectively eliminated any chance that the Bank of Japan would raise interest rates when it holds its monthly meeting on rates next week.

Japanese futures markets Monday were pricing in a zero percent chance of an interest-rate hike next week, down from a 4% chance as of last Friday, according to calculations by Credit Suisse.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.